Welcome to the Grupo Financiero Galicia's second quarter 2019 earnings release call. Today's call is being recorded. At this time, I'd like to turn the call over to Pablo Firvida. Please go ahead.
Thank you. Good morning, and welcome to this conference call. I will make a short introduction, and then we will take your questions. Some of the statements made during this conference call will be forward-looking statements within the meaning of the safe harbor provisions of the U.S. Federal Securities Laws and are subject to risk and uncertainty that could cause actual results to differ materially from those expressed. According to private estimates, the Argentine economy recorded a 0.1% year-over-year contraction during the second quarter of this year, compared to a 7.1% year-over-year contraction in the first quarter of this year. During the first half of 2019, the primary fiscal surplus amounted to ARS 30.2 billion, in excess of the ARS 20 billion target for the period. According to the National Institute of Statistics and Censuses, the National Consumer Price Index recorded a 22.4% increase during the first six months of the year.
On the monetary front, the Argentine Central Bank expanded the monetary base by ARS 24.3 billion in the second quarter, a 1.8% expansion against the first quarter. Meanwhile, the exchange rate averaged ARS 43.72 per USD in June, a 5.7% increase against the average for March 2019. When compared to June 2018, the FX rate increased 62.3%. In June, the average rate on peso-denominated private sector term deposits for up to 59 days was 49%, almost nine percentage points above the average recorded last March. Private sector deposits in pesos amounted to ARS 2.4 trillion, increasing 9.5% during the quarter and 49.5% in the year. Transactional deposits in pesos rose 13.9% during the second quarter and 31.3% in the year. Peso-denominated term deposits increased 5.7% in the quarter and picked up 72.3% year-over-year.
At the end of June, peso-denominated loans to the private sector amounted to ARS 1.54 trillion, recording a 0.6% increase during the quarter and a 0.2% increase when compared to June 2018. Turning now to Grupo Financiero Galicia. Net income attributable to Grupo Financiero Galicia for the second quarter amounted to ARS 11.6 billion, 316% higher than the same quarter of the previous year, mainly due to profits from Banco Galicia for ARS 10.1 billion, from Tarjetas Regionales for ARS 922 million, from Sudamericana Holdings for ARS 314 million, and from Galicia Administradora de Fondos for ARS 114 million, increased by net operating income of ARS 109 million and partially offset by personal and administrative expenses of ARS 52 million. This profit represented a 7.3% annualized return on average assets and a 68.9% return on average shareholders' equity, compared to 3% and 24.8% a year ago.
For the profit per share amounted to ARS 8.11, compared to ARS 1.95 per share for the same quarter of 2018. Going to Banco Galicia, net income for the quarter increased 414% from the year-ago quarter as a result of a higher net operating income, mainly related to the growth of the net income from financial instruments, partially offset by higher loan loss provisions and interest expenses. Net interest income for the quarter decreased 83% as compared to the same period of 2018, primarily as a consequence of a 254% higher interest on term deposits and term investments. This decrease in net interest income was more than compensated with the increase in net income from financial instruments, which was up by ARS 16 billion from the ARS 1.5 billion recorded in the same quarter of 2018.
This was a consequence in the increase in results related to a greater volume of LELIQ holdings, together with a higher yield on this instrument. Profits from gold and foreign currency quotation differences amounted to ARS 2.3 billion, including an ARS 2.2 billion profit from foreign currency trading, and were 198% higher than the same quarter of last year. Provision for loan losses for the quarter amounted to ARS 3.1 billion, 115% higher than the same quarter of the prior year, mainly due to the evolution of arrears in the consumer portfolio. Personnel expenses increased 56% as compared to a year before, in line with the accumulated inflation for the period, and mainly due to salary increase agreements with the union.
In addition, administrative expenses grew 64%, mainly due to higher fees and compensation for services and higher taxes. The income tax charge was ARS 1.6 billion, ARS 802 million higher than in the second quarter of last year. During this quarter, in accordance to the income tax law and to the evolution of the consumer price index, this charge was adjusted by inflation for tax purposes. The bank financing to the private sector reached ARS 295 billion at the end of the quarter, up 21% in the last month, 5% growth for the ARS financing, and 9% for the financing in US dollars. Deposits reached ARS 409 billion, up 57% in a year, with ARS-denominated deposits growing 54%, and $ deposits 8%. The bank's estimated market share of loans to the private sector was 10.6%, 57 basic points higher than at the end of the year-ago quarter.
The market share of deposits from the private sector was 10.7%, recording a 24 basic points increase in the same period. As regards asset quality, the NPL ratio ended the quarter at 4.63%, recording a 236 basic points deterioration as compared with the 2.27% of the second quarter of the prior year. The coverage of NPLs with allowances reached 108%, up from 103% from a year ago. As of June 30, 2019, the bank's consolidated computable capital exceeded by ARS 31 million, or 106%, the ARS 39 million minimum capital requirement. The total regulatory capital ratio reached 16.98%, increasing by 359 basic points from the same quarter of fiscal year 2018. In summary, during the second quarter of 2019, Grupo Financiero Galicia has shown results in a very challenging macro environment, keeping liquidity, solvency, and profitability metrics at high levels.
Now we are ready to answer the questions that you may have. Thank you.
Thank you. If you'd like to ask a question, please signal by pressing star 1. Press star 1 to ask a question. We'll now take our first question from Jason Mollin from Scotiabank. Please go ahead.
Thank you very much. Hi, Pablo. My question is, given the current volatility in the markets that we've seen following the primary elections, if there's been a change in how the bank is positioning itself in these days. It's very early, we've seen your exposure to short-term, well, in this case it's short-term government bonds, increase dramatically over time. That's a sector-wide phenomenon given the operating environment. Is this level of the current concept to be expected the bank to have about a quarter of its assets in LELIQs and other debt securities? Thanks.
Hi, Jason. As you said, it's too early to take different actions, mainly because what we saw on last Sunday was the results of primaries. We have 75 days for the elections. Many people are saying that still Macri has some probability of being reelected. This, I would say, political uncertainty for the next 75 days is bringing uncertainty and volatility to the FX market that will create some pressure on inflation. We are very liquid, very well capitalized, and we act, I would say, quickly and very flexible. LELIQs are auctioned twice a day, we can, I would say, moderate the amount very quickly. Actually, in a week, we could go from ARS 127 million, that was the number at the end of June, to zero, if we wanted to.
In the second quarter, it was our main source, I would say, of revenues as we were taking term deposits and investing this liquidity in the LELIQs. In terms of FX position, we are hedged. Last Friday, we were at around $15 million-$20 million long considering the spot position and forward. Really, everything is very short-term. we are, I would say, quickly to react, or we react quickly to any potential change in any macroeconomic variables. I don't know if the answer was too wide, or you want more color on specific decision or variables.
That's helpful on your positioning. It is early. Maybe just some additional color on what you're seeing and what you saw yesterday, what the bank saw yesterday and today in the FX market. I guess the spread is very wide. Are customers going to the bank and transacting at what kind of spreads for the Argentine Peso versus the US dollar?
Well, yesterday the volume was in the spot market in all the country was $550 million in the spot. In the forward market, the ROFEX was about $900 million. These numbers are below the average of the last, I would say, month or 30 days. The average in the spot was something around $700 million. Of course, what a surprise was the jump with this kind of small volume. Right now, we are seeing some dollarization, really nothing, I would say, out of the average. We have, of course, to monitor if the political environment gets better and people get calmer. Right now, you don't see people in branches because you can dollarize your pesos just with a click with your either mobile or your computer. The volumes are really ordinary, nothing strange.
That's helpful. Thank you very much.
You're welcome.
The next question comes from Gabriel Nobrega from Citi. Please go ahead.
Hi, Pablo, thank you for the opportunity to ask questions. My question is sort of a follow-up to the previous question. Looking ahead, being that we saw quite volatile movements in the market yesterday, we're also seeing an increase of around 12% in the MERVAL today. I would just like to maybe pick your brains and understand where do you think are the main challenges in these next 75 days until the elections? If you are already thinking of any strategies that the bank could take in these possible next few days? I'll make a second question afterwards. Thank you.
Okay. Well, in my opinion, the market reacted yesterday very negatively to the potential change in government. I think it was a big surprise because most of the pollsters were giving a very tight scenario. Even some polls were showing that Macri could be winning either in first round or even in ballottage. The difference between Alberto Fernández and Macri really surprised everybody. In my opinion, because it's not clear what would be their actions or decisions if they are elected in October or November. This uncertainty created this run on the peso, the shares, and also the country risk premium, it jumped considerably. I think one of the main variables to monitor is the FX, because Argentines think in US dollars, and if there is a lot of volatility in FX, people get uncomfortable or worried.
We have many years of history during this, well, or the previous century, not only this century. That is, in my opinion, the main variable. That affects inflation because there is, as we again, think in dollars, there is a pass-through to prices if there is movement in the FX. It's not clear what percentage of any potential devaluation goes to prices and how quickly, but definitely it puts pressures on inflation. That, in my opinion, will be if the FX market is calm, it's a good signal that this period of time till the elections will be easier for the government to manage.
All right. That was very helpful. As for my second question, I know it may be too early. Have you seen anything in terms of a deposit run? Do you think that there could be any worrying side from the bank if we actually see people running to take their deposits out of the bank?
No. Well, the numbers we mentioned are as of June, but we are seeing deposits in pesos growing, deposits in dollars. In our case, the number yesterday was $4.5 billion in the case of the bank. Dollars denominated deposits measured in dollars. They are, I would say, quite stable. Of course, we are monitoring that very carefully, permanently, I would say. We are, in my opinion, over-liquid, even we took some measures, like for example, importing dollar bills just in case. We perhaps will have lower profitability, but we want to be very secure and comfortable with our liquidity, not only in terms of loan to deposits in pesos or in dollars, but also in terms of having the bills. The dollar bills in case there is some kind of run, as you mentioned. Again, so far, no.
Thank you for your answers, Pablo.
Mm-hmm. You're welcome, Gabriel.
The next question comes from Ernesto Gabilondo from Bank of America. Please go ahead.
Hi. Good morning, Pablo, thanks for taking question. My first question is if you can share any color on the potential plans of Alberto Fernández. I believe he has mentioned before he will honor the Argentine debt, he has expressed against the Leliq before. From your point of view, what does Alberto will likely do different from Macri? How comfortable can we be that they will not come back to put the measures during the Kirchner's period, especially having Cristina running as vice president. Do you think the new government will want to make stronger again the state-owned banks in Argentina? On my second question is related to your strategy to protect the asset quality under this environment, given your exposure in credit cards and that your reserve coverage ratio is at 100%.
Under a more conservative approach, do you expect to increase the reserve coverage ratio? Thank you.
Okay. Hi, Ernesto Gabilondo. What I can say, I would say about Alberto Fernández is what I heard from political analysts that met him in the past. Of course, these are opinions from third parties. I would say that like a summary, he's a Peronist from the city of Buenos Aires. I would say a little bit more intellectual, to put a name or word, not the typical guy from a province very far from Buenos Aires, where some governors especially are like mini kings. This is, I would say more intellectual, more open to dialogue, more, in another word, democratic. He's a guy who you can speak with. He has been saying that he will honor debt, that he will not do strange things, that he wants, of course, to have a better economy in terms of consumption, SMEs, and so on.
The thing is that, in general, no politician says how they are going to do it. The big, I would say, doubts, and in my opinion, why the market react so badly is because in his party or coalition, there are many different, I would say, ideologies. In the past, the Kirchnerism didn't take particularly orthodox measure. That's why some people are a little bit worried. On the other hand, looking at the economy now, there are less degrees of, I would say, flexibility in terms of now you have the IMF with a big financing package. There are not many stocks, inventories, I want to say, to sell or distribute. The government, the current government, improved what was the big twin deficits. Now we are closer to fiscal surplus, and also the current account deficit has shrunk dramatically.
In this sense, the starting point would be easier. Of course, the big variable that is missing is inflation. That is, I would say, the main critic that the population makes to this government. I also read that some analysts are saying that the probability of Alberto Fernández being more, I would say, market-friendly is 70%. On the other hand, like 25% or 30% would be being more influenced by the Kirchnerism. That is, in my opinion, why there is this uncertainty. Going to the asset quality, we want to have the coverage above 100%. In June, at the end of June, NPLs at the bank were in the order of 4.6%, in the case of Naranja, at 12%. In July, we saw some improvement due to the 13th salary, the aguinaldo, and also some recovery in purchasing power.
We have to see how the second half of the year evolves in terms of effects, inflation, and the salary agreements. In theory, there should be some flattening of the NPLs. We were forecasting some improvement towards the end of the year. That must be monitored, but again, we are going to increase our provisioning in order to have coverage above 100%.
Thank you, Pablo. Just a follow-up. Just given this high inflation, do you think Alberto can use the state-owned banks to lend if private banks don't want to do so? The second question, given that the asset quality is improving, you don't see the reserve coverage ratio having to get up, right?
Well, in terms of what, let's say again, the potential new government can do with the state-owned banks, it's a question mark. Typically, they don't commit, I would say, suicide. They don't do stupid things, and they have to fulfill all the regulations from the central bank in terms of capital requirements, reserve requirements, and so on. Perhaps they could try to launch certain subsidized loans, but really, in my opinion, wouldn't be disruptive for the market at all. Again, if the asset quality deteriorates further in the coming months, we will be increasing the provisioning or the cost of risk in order to keep the coverage above 100%. That is our internal policy.
Perfect. Thank you very much, Pablo.
You're welcome, Ernesto.
The next question comes from Nicolas Riva from Bank of America. Please go ahead.
Thanks, Pablo, for taking my questions. Two questions. The first one, when you look at the main trends in terms of credit growth, NPLs, they were already quite challenging even before what happened on Sunday. NPLs increasing, loan growth negative in real terms. How does what happened on Sunday actually change your outlook for loan growth and NPLs for the second half of the year? How much worse does it make it? Then second, it's probably a follow-up on previous questions, but in the past, Cristina's government, they did some measures which were negative for the banking sector, like putting caps on interest rates, floors on rates on time deposits, the directed lines for SMEs. Are you concerned about any of those measures coming back in a likely Alberto Fernández administration? Thanks.
Hi, Nicolas. The credit demand or loan demand has been very soft, mainly because of the high level of interest rates. All the banks in general, were very conservative and still are conservative in granting, and also the demand is very low, again, because of the high level of interest rates and also because of the soft economy, too. With the interest rates going down, as we were seeing till last week, we were beginning to see some kind of new origination. Interest rates came back to very high levels, so we are not foreseeing any growth. Of course, not growth. Actually, there will be a reduction in real terms in our loan book. NPLs, in part, are deteriorating due to this, because the denominator is not growing. There is no net origination.
We could see some slight deterioration, but really, loans to GDP was very low, and today it's even lower, so really there is not much room for further deterioration. Of course, we must monitor, again, inflation compared to salary increases and the evolution of the different sectors of the economy. We will, I would say, be able to comment on any potential measure once we know the measure. In the past, yes, we saw some kind of, as you said, caps on certain interest rates or minimum interest rates on time deposits or subsidized lending to SMEs. In general, these were measures that had as an objective, for example, to move the economy, to foster the economy, not really to make bankers' life more difficult. It was like a tool to try to foster the economy. Most of these measures were offset with other decisions that we took.
We many times say that we can estimate the instant or potential effect on one regulation or measure. What happens in the end is that we take other actions to offset these things. Again, we cannot say if we are worried or what they could do. We need to see first, that the government or the opposition wins, then if they take any action.
Okay. Thanks, Pablo. Thanks very much.
You're welcome.
As a reminder, to ask a question, please press star one. The next question comes from Carlos Gomez-Lopez from HSBC. Please go ahead.
Hello, Pablo. I'm coming late to the call, so maybe this has been asked already. I'm asking about the very high level of LELIQ and very high level of NIM in this period. How sustainable is this into this year and next year? Obviously, with all the uncertainty that we have today, given that you are not growing the loans but you are growing the LELIQ, what would be a range of possible returns that you might expect next year relative to inflation? Thank you.
I don't know if I understood, because the line wasn't very clear. You ask about the level of LELIQs, how sustainable they are, and yields going forward?
Yeah. How sustainable the level of NIM is, more than LELIQ, the level of NIM.
The impact. Mm-hmm
what type of return that you think that you can have in real terms, which is how you will publish it next year. Again, we understand it's very uncertain at this point.
Mm-hmm. Yes. Well, hi, Carlos. As I mentioned, as of June, we had about ARS 127 billion of LELIQs that made us have very high, not only financial income from instruments, but also it had a very positive impact in terms of net income, because the stock grew and also the yield increased. It's a stock that can change very quickly, and we have flexibility because every day there are two options. Today the number is below ARS 100 billion, to give you an idea. The yield also is very volatile. In a virtuous cycle, what should be happening is that when interest rates go down, loan demand would peak up and there would be a shift from LELIQs to lending to the private sector. NIM for the quarter, including the Leliq, of course, because we are financing LELIQs with term deposits, was around 21%. It's abnormally high.
If the Leliq yield goes down to previous levels, not the 70+ we are seeing today, more to the 50+ we saw a couple of weeks ago, NIM definitely should go down. When NIMs compress, it means that volume is recovering. It would be much healthy and better for us to have more volume with lower margins, and not as it is the case today. This is a scenario with, as many of you mentioned, a very challenging macro scenario. The good news is that we are protecting profitability through this central bank paper.
What would be the normal level of NIM, then?
Normal is a hard word.
It's a very big word in Argentina.
Yeah. No. One year ago, margins, or I would say 18 months ago, margins were around 12%-13%. It should go down to these levels, but we have to see how many quarters we need to get to these levels. It will be a function of the effects and inflation, of course.
Right. Returns for next year?
On what? Sorry.
Returns for next year. What does the bank aspire to have in 2020?
Well, our objective, and even internal calculation, is to have a real return on equity above 10%. It could be even higher this year, but next year, due to regulations, we will have to have all the numbers adjusted by inflation. We will see just one number, not nominal and adjusted by inflation. The objective is to have, I would say, around or above 10% real return on equity.
Thank you very much.
You're welcome, Carlos.
Once again, it is star one to ask a question. The next question comes from Yuri Fernandes from JPMorgan. Please go ahead.
Thank you, gentlemen, for the opportunity of asking questions. I have the first one regarding the cost of capital you use internally. If you can comment, what is the cost of equity you have for internal projects? And if you can also comment, what was this cost of capital back in 2013, 2014, if you have some idea what you used to have in the past? That's one. My second question is regarding the effective tax rate. I got you have inflation accounting here, and that explains the benefit. Excluding inflation adjustment, what would be the normalized effective tax rate for Galicia? Thank you.
Yes. Hi, Yuri. I will begin with the last one. In this quarter, we made the calculation for income tax, adjusting by inflation. The charge was around ARS 1.3 billion. The inflation adjustment was around ARS 2.7 billion. It would have been that amount higher the income tax if we hadn't done the adjustment. That is because the income tax law said that if this year inflation is higher than 30%, we could consider inflation adjustment for the calculation of income tax. As for the first six months, the cumulative inflation was 22.4%. We consider that it's impossible to have lower than 30% this year. In terms of cost of equity, of course, we don't calculate it on a daily basis. It's been very volatile, the country risk premium. I would say, on average, in the last three years, was closer to 12% in USD.
Definitely these days, it should be higher. The consequence is that not new projects are analyzed. We are not initiating any new project. We are in a more, I would say, conservative and wait-and-see mode.
Thank you very much. Thank you.
You're welcome, Yuri.
The next question comes from Tunde Ojo from Harding Loevner. Please go ahead.
Hi, Pablo. How are you doing? Thanks for the presentation. A quick question from me is on any sort of impact you've seen in the banking sector, and then probably more relevant here at Galicia in the last two days, in terms of behavior of customers to this new political or economic uncertainty. I think my line of questioning is in two parts. Have they sort of dollarized significantly? Apologies if you answered that question before. Number 2 is any sort of bank run, like people putting money in safe deposit box or people taking money out of the banking system. Are you seeing any early signs of that yet or not? Thanks.
Hi, Tunde. Well, I mentioned that the volume in the stock market yesterday for the country was $550 million, much lower than the average of the last 30 days. That was about $750 million. Yesterday, the dollar grew from levels of 45 to 53. Really, people, it's well dollarized. There are some estimates from the Minister of Economy or even the Central Bank that around 83%-85% of the assets of the private sector are in dollars. So really, there is not much room. So far, we didn't see any, I would say, abnormal behavior. Of course, I would say this volatility creates some worries. Again, it's so easy to dollarize. You don't need to open banks. That if people can wait and see the price of the dollar, it was very volatile yesterday. It is volatile today. Really, so far, nothing abnormal, I would say.
Again, we took preventive measures in order to be even more liquid, to have more dollar bills, not only in our safe deposit box, big one, but also in the different branches to avoid any potential, I would say, reputational damage.
Okay. Thanks.
You're welcome.
The next question comes from Carlos Gomez-Lopez from HSBC. Please go ahead.
Yes, Pablo, a follow-up on the tax. The adjustment that you made, ARS 2.7 billion, that refers to your tax liability of 2019, the current fiscal period. That you have taken, so you are effectively using inflation accounting for the current period. You have not provisioned for it, so that has gone to the income statement. Do we understand correctly?
Carlos, I cannot hear you clearly. Can you repeat, please?
Yeah. Let me try to repeat and be more clear. Right now, you have taken ARS 1.3 billion in taxes. You have used inflation adjustment, and this is for the 2019 fiscal period. It is for the current period, right?
Yes.
This is not an adjustment for 2018. This is for the current period, and it is not also neutralized with the provision. You have actually taken this benefit through the income statement. Do we understand correctly?
Yes. The adjustment is for the first six months of this year. The income tax charge for the holding company was ARS 1.3 billion. If we hadn't made this inflation adjustment, it would have been closer to ARS 4 billion.
All right, thank you. For 2018, you did not take an inflation adjustment, at least not through the accounting. You may have made a claim.
No
normal accounting, right?
Yes. In the year 2018, we didn't use inflation adjustment because the law said that if inflation was higher than 55%, we could take that inflation adjustment. Last year, the inflation was around 47%, so we didn't make any adjustment. Of course, there is a parallel way, that is to make a case with the local IRS, the AFIP, and say that we think that there should have been inflation adjustment in previous years. It's not considered in our numbers.
Okay, that's very clear. Thank you very much.
You're welcome, Carlos.
As there are no further questions signaled, I'll now turn the call back to your host for any additional or closing remarks.
Okay. Well, thank you, operator. Thank you all for attending this call. If you have any questions, please do not hesitate to contact us. Have a good day. Thank you.
That will conclude today's call. Thank you for your participation. You may now disconnect.